The Chapter 11 “Cramdown:” How To Use One to Your Company’s Advantage

In a Chapter 11 business bankruptcy, a “cramdown” allows the business to secure court approval for its reorganization plan without its creditors being on board. This can be critical in some cases. While creditors will generally be willing to consider reasonable proposals for reorganizing a business’s debts during the Chapter 11 bankruptcy process, it isn’t always possible to find a path forward that adequately serves the interests of all parties involved. So, when can (and should) you pursue a cramdown? An experienced Miami Chapter 11 bankruptcy lawyer explains:

When to Consider a Cramdown in a Chapter 11 Bankruptcy

While the U.S. Bankruptcy Code doesn’t explicitly use the term “cramdown,” it includes provisions that allow for cramdowns in appropriate cases. Specifically, 11 U.S.C. Section 1129(b)(1) provides:

“[I]f all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”

Subsection (a) of Section 1129 outlines the conditions for securing confirmation of a proposed reorganization plan in a Chapter 11 business bankruptcy, and paragraph (8) requires that each class of creditors affected by the plan either “has accepted the plan” or “is not impaired under the plan.” Thus, a “cramdown” under Section 1129(b)(1) involves securing confirmation even though the business’s creditors have objected (or have grounds to object) to the plan as proposed.

One of the requirements for pursuing a cramdown under Section 1129(b)(1) is that the business’s reorganization plan must be “fair and equitable.” Section 1129(b)(2) goes on to define these terms.

Under Section 1129(b)(2), the standards for “fair and equitable” treatment differ for secured and unsecured creditors. Meeting the relevant standard with respect to each creditor entitled to participate in a business’s Chapter 11 bankruptcy proceeding is essential for pursuing a cramdown successfully:

• “Fair and Equitable” Treatment of Secured Creditors – To be “fair and equitable” to secured creditors, a cramdown must allow those that do not approve of the plan to retain their liens and receive deferred cash payments that are at least equal in value to their collateral, or the collateral must be sold with their liens attaching to the proceeds. As an alternative, secured creditors may also receive the “indubitable equivalent” of the value of their claims—typically, what they would have received under their original loan agreements.
• “Fair and Equitable” Treatment of Unsecured Creditors – A cramdown will be deemed “fair and equitable” to unsecured creditors if either: “(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property . . . .”

Determining whether a cramdown is a viable solution to a challenging Chapter 11 bankruptcy isn’t always (or often) easy. Understanding individual creditors’ rights can be challenging; and, by their nature, attempted cramdowns turn contentious in many cases. Even so, a cramdown will often be the most cost-effective path forward; and, by working closely with an experienced Chapter 11 bankruptcy lawyer, business owners can ensure that they are making informed and strategic decisions with their companies’ long-term best interests in mind.

How to Use a Cramdown to Your Company’s Advantage

Let’s say you are contemplating a business bankruptcy under Chapter 11. How can you use a cramdown to your company’s advantage?

Pursuing a cramdown (when necessary) starts with identifying all creditor claims—both secured and unsecured—that will need to be addressed in the cramdown filing. A comprehensive and proactive approach is key, as the judge will need to be thoroughly convinced that a cramdown is warranted and that overlooking relevant creditors’ claims can lead to costs, delays, and complications that could (and should) have been avoided. With the necessary legwork out of the way, pursuing a cramdown becomes a matter of preparing the relevant filing and presenting a compelling case to the judge presiding over the business’s Chapter 11 bankruptcy proceeding.

Do You Need to Do a Chapter 11 Cramdown?

Before pursuing a Chapter 11 cramdown (and before pursuing a Chapter 11 business bankruptcy at all), it is important to critically assess whether this is the best approach to resolving your company’s financial struggles. Depending on the circumstances, there may be other viable (and preferable) options available. For example, some potential alternatives include:

• Working Out a Resolution with Outside of the Bankruptcy Process – In many cases, businesses can avoid disputes with creditors during the Chapter 11 bankruptcy process by working out informal resolutions before the process begins.
• Pursuing a Subchapter V Small Business Bankruptcy – A Subchapter V small business bankruptcy is an alternative to a traditional Chapter 11 bankruptcy in which there is no creditors’ committee and creditors do not have the opportunity to file competing plans.
• Continuing to Seek Approval of the Proposed Reorganization Plan – While roadblocks with creditors can get in the way of completing a Chapter 11 bankruptcy temporarily, in some cases it will be more cost-effective to seek to overcome these roadblocks rather than attempting to bypass them with a Chapter 11 cramdown.

Speak with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman

Do you have questions about pursuing a Chapter 11 business bankruptcy? If so, we invite you to contact us for more information. To speak with an experienced Miami Chapter 11 bankruptcy lawyer at Edelboim Liberman in confidence, please call 305-768-9909 or request a confidential initial consultation online today.